Westpac, one of New Zealand's largest banks, has revised its inflation outlook, warning that consumer prices are set to heat up again in the final months of the year. In a research note released Friday, the bank said it now expects annual inflation to reach 4.2% by the end of 2025, a notable upgrade from its previous forecast.
The revision comes as the bank also trimmed its expectations for the housing market, now predicting a 1.4% fall in house prices during 2026. That marks a more pessimistic view than before, reflecting a softer economic backdrop.
What the new numbers show
Westpac's updated forecasts point to a 0.7% rise in consumer prices in the September quarter, which would bring annual inflation down to 3.7% from the 4.1% recorded through June. But the bank expects that cooling trend to reverse, with a sharper 1.1% jump in prices in the December quarter, pushing the annual rate back up to 4.2%.
In other words, the recent progress on inflation is likely to stall, and prices could re-accelerate just as the central bank and households were hoping for relief.
Inflation measures how much the prices of everyday goods and services—from groceries to rent to petrol—rise over time. When inflation is high, each dollar buys less, which erodes purchasing power and can prompt central banks to keep interest rates elevated.
Why inflation is picking up again
The bank didn't specify every driver in its note, but the broader picture is familiar to investors watching global markets. Energy costs have been a persistent wildcard, with oil prices recently surging to levels that have reignited inflation concerns in several economies. Oil's climb to $104 has already pressured stock markets and raised fears that central banks may need to keep policy tight for longer.
New Zealand, like many countries, is also dealing with the knock-on effects of higher import costs and domestic price pressures that have proven stickier than initially hoped. The bank's forecast suggests that the disinflationary trend seen earlier this year is losing momentum.
What it means for interest rates and the housing market
For everyday investors, the key question is what this means for the Reserve Bank of New Zealand (RBNZ). If inflation is indeed set to reaccelerate, the central bank may be less inclined to cut interest rates aggressively, or it could even pause its easing cycle. Higher-for-longer rates tend to weigh on economic growth and can put downward pressure on asset prices, including property.
Westpac's downgrade to its house price forecast—now expecting a 1.4% decline in 2026—reflects that reality. Property markets are sensitive to borrowing costs, and if rates stay elevated, demand for housing could soften further.
That said, a 1.4% drop is relatively modest, and it's worth noting that forecasts are often revised as new data comes in. The bank's view is just one of many, but it does signal that the path for both inflation and housing is far from smooth.
Broader context: a global inflation story
New Zealand is not alone in facing renewed price pressures. Central banks around the world have been wrestling with inflation that refuses to fade completely. In Sweden, for instance, the Riksbank has signaled a possible November rate hike as inflation remains sticky. Mexico also saw its inflation rate tick up in September, even as core measures cooled.
In Australia, analysts have pointed to the AI data center boom as a potential source of sticky inflation, as surging electricity demand and construction costs feed into prices. These examples highlight a common theme: the final stretch of bringing inflation down to target is often the hardest.
What investors should watch
For investors with exposure to New Zealand assets—whether through bonds, property, or the kiwi dollar—the key indicators to monitor are the quarterly inflation prints and any signals from the RBNZ. If inflation comes in hotter than expected, bond yields could rise, and the currency might strengthen as markets price in a more hawkish central bank.
Conversely, if inflation surprises to the downside, it could open the door to faster rate cuts, which would likely support housing and growth-sensitive stocks.
It's also worth remembering that inflation forecasts are notoriously uncertain. Westpac's upgrade is a warning sign, but it's not a certainty. The bank itself still expects inflation to cool to 3.7% by September before the reacceleration, so the next few months of data will be crucial.
For now, the message from Westpac is clear: the battle against inflation isn't over, and the road to lower interest rates may be bumpier than many hoped.
